The Great Shale Revolution
The FT has a should be read piece on the end of the Great Shale Revolution. It's fairly good, not quite accurate, and unintentionally humorous at times. Start out with the lede being buried, and as a habitual lede burier, I speak with authority.
The lede is,
“The aggressive growth era of US shale is over,” says Scott Sheffield, chief executive of Pioneer Natural Resources, the country’s biggest shale producer. “The shale model definitely is no longer a swing producer.”
Shale basically stalled right before Covid, then declined, and hasn’t yet reached back to where it was. Saying shale was a swing producer isn't quite right. They added to global oil production that was pretty much at full tilt, bringing prices down some, but all the oil was instantly consumed. There was no swing. Pioneer's Sheffield rightly points out,
“We produced too much oil and competed with Opec. We actually lowered the price by $20 to $30 per barrel over the past 10 years to the detriment of losing our entire investor base.”
Which gets to an important point for our era's red in tooth and claw, increasingly fantastical capitalism, shale hasn’t been profitable. There's never been a good accounting of who actually bore the losses, but then accounting is a quaint, archaic notion for our crypto-currency, electric car future, just ask Misters Bankman-Fried and Musk.
Deloitte did a report a number of years ago saying $300 billion in losses, and hey, their numbers are as rigorous and reputable as McKenzie's, that’s why people pay them – right? I recently saw $500 billion somewhere. However, no one ever says who exactly took the losses. It's always Wall Street or investors with no specificity. My guess is pension funds and private equity were the biggest losers, but that's just a guess. Most importantly as Mr. Sheffield states, they lost their entire investor base. Such is the fate of many of revolutions.
Getting to the nut, looking at the geology, the FT goes to the Bakken, the Lexington and Concord of the Shale Revolution,
“Nowhere encapsulates shale’s story better than North Dakota’s Bakken field. In the decade to 2020, the state’s oil production rocketed more than sevenfold to almost 1.5mn barrels a day, more than some Opec members produce.”
“The Bakken’s output slumped to a little over 1mn b/d and has barely recovered. Just 39 rigs were operating across the field in the first week of January, down from more than 200 a decade ago. Continental Resources, Hamm’s company, has gone hunting for shale resources elsewhere. The Bakken’s heyday is over.”
Phew, the Bakken’s heyday is over! And not with a whimper but a bang. If I have my maths right, as they say on that dreary, cold, windswept rock in the North Atlantic, Bakken's production is down one-third in two years! Understanding shale maths, this was to be expected – stop drilling, stop producing. The FT writes,
“Unlike conventional oil production, output from newly drilled shale wells plummets after a year or so of operation. To hold output steady each year, companies must keep drilling more wells. Tens of thousands have been drilled across the US in the past 15 years.”
You'd think after over a decade, the FT, one of the world's premier financial rags, could come up with a little better number, or a least a number, instead of “plummets.” But then again, we live in an era of all sorts of revolutions, including finance disruption, numbers don’t really matter, just liquidity, leverage, and how much the Fed and other central banks are pumping.
Looking at the Bakken, what the Financial Times doesn't say is over the next decade it is possible, probable, the output of American shale in entirety could plummet below half or even less of what it is today. Getting to the biggest question, where would more oil come from? Remember, two years ago, the Sauds announced they were spending a hundred billion to raise production capacity just another million barrels over the next decade. Leaving aside whether they can actually do it, a million barrels doesn’t make up for a loss of four or five.
Finally, the FT provides a punchline for the whole affair,
“The golden age of shale “vaulted the United States back to the top of the table in terms of geopolitical significance”, says David Goldwyn, a former senior energy adviser to Barack Obama and head of Goldwyn Global Strategies, a Washington consultancy. “The US is no longer in a position where it has to worry about the physical supply of oil or gas . . . and that gives it a great deal more freedom of action in international affairs.”
Boy, the Shale President, refused to hold the economy destroying bankers and the blood-soaked Iraq War prevaricators accountable, unaccountably funneled hundreds of billions of dollars more a year into a dysfunctional, corrupt health-care system, and blew up Libya and Syria, the Obama legacy is not smelling very sweet.
Finally, the most important thing to keep in mind when reading the FT article, especially for all those most recently dependent on American LNG, shale maths are the same for natural gas as they are for oil. In just the last 20 years, the world has become ever more dependent on natural gas with consumption up more than 60% – Good luck with that.